The Real Reason Doctors Can’t Pay Down Their Student Debt

I was sitting at work once (and many times after), talking to colleagues of mine who were all in their early thirties – fairly young by doctor standards. We were talking about student loans (what else?) and how steep the price has become to get an education (in this case dental, but it applies to education in general). We were going through our numbers and they were going through their excuses as to why it was impossible in their situation to pay down debt. Of course, me being me, I gently stated the obvious which was that the real reason doctors “can’t” pay down their student debt was because they thought they deserve more than everyone else.

This statement may hurt many doctors’ feelings, but actually, it’s true.

For example. I had one person complaining about drowning in student debt. He blamed it on the kids and the fact that he is a single income household. Fine. But he also just bought a brand new Tesla SUV. He gets a nanny to watch his kids so that it’s easier on his stay-at-home wife. He gets help (did he say $100k a year??) from his in-laws that is budgeted for the kids. His dining out bill is $800 a month. But he can’t afford his student debt.

Another person also bought a brand new car after graduation, enrolled his 6-month old in Montessori private school, took wild vacations (without travel hacking!), and bought a grand house for their family of three.

Yet another person owns two medical-grade massage chairs in his home, bought his girlfriend a Tesla, and drops $10k on trips around the world.

What if I told you that this story is repeated many times over? I have spoken with my fair share of indebted graduates, especially after releasing my own personal story with ChooseFI.

They all wish to banish their student debt. They also don’t wish to do the work.

Here’s the thing I see most often with doctors. They work very diligently to get through school. They do anything to get to their dream career, including taking out a huge sum of moolah (hell, I did too).  They sacrifice the best of their young years. They put off buying a home, earning money, and settling down. Then graduation hits and they think, “I’ve made it.” For a brief second, they breathe a sigh of relief thinking it’s all going to be worth it.

So they buy a new car to celebrate. Then they buy a home or a practice. They go out every weekend for food. Sometimes they dine out a few times a week! They want to live in affluent communities. They want to go on vacation. They throw themselves a dream wedding. They buy nice clothes and expensive Figs scrubs. But more than all this are the little purchases. They want the daily coffee, the trinkets from the $5 section in Target, the happy hour events, the spin class – you know, the harmless stuff.

They become obsessed with the high-life and quite quickly, they refuse to give it up. 

And if you think I’m being extreme, I’m not.

Because when I graduated, I wanted all these things, too!

The most excruciating part about facing my student debt, the part that nearly killed me, was realizing that after every sacrifice and sleepless night, after giving up the best of my youth, after working three jobs during school, after wracking my brain on ways to extend $40 for another week, after being a model student, the good daughter, the most loyal employee, the most valuable I could be to the community – the work was still not done.

And when I tell new grads coming to me for advice on making loans disappear that they have to use their beat-up high-school ride, possibly move-in with their parents or take on a roommate, cook dinner every night, manage a budget every week, wear their same scrubs from dental school for five more years, and try their darndest to travel for FREE – well, their faces fall and I can see the disappointment plain as day scrawled on their furrowed brows.

Only thing is, I can’t tell if the disappointment lies in the fact that they have to continue living like a college kid for ten more years or if the disappointment lies in me – because I wasn’t the magic genie they wanted that would grant them their wish.

I can tell you how to repay your loans. You just might not like it.

99% of graduates with more than $350k of debt choose to stay with loan forgiveness. Probably because it hurts the human psyche too much to know that everything you’ve done thus far is not enough.

Becoming a doctor does not end the day you graduate. Not for me. It ends the day everything you need to become a doctor is behind you. Loans included.

Not everyone thinks this way, though. Many people truly believe that the hardship stops the day you get the degree. Ahhh, time to sit back and enjoy the benefits of all our hard work. But how can that be when you don’t even know what a hard-earned dollar looks like?! What makes you better than the rest of ’em?

I know I’m making enemies here but I must pose the question. If not I, who will?

I don’t blame the docs. They were merely children when they signed their lives away for a chance at the American Dream. I blame our upbringing for creating the expectation that a doctor’s life is a rich and easy one. I blame the institutions that are set in place that allow universities to charge this much money to get educated. I also blame lending companies who are handing out loans this large. Child robbery, that’s what I call it.

I implore to all the existing doctors that make it seem like being a doctor is easy. How will we ever change the trajectory if we keep implying to young ‘uns that pursuing this career path will mean they won’t have to work hard for the rest of their life. How will they realize and make an informed decision when the time comes?

I know the real truth.

That behind the facade of wealth is an increasingly long list of medical professionals patiently waiting 25 years for loan forgiveness to hit. Behind every confident thrust of the credit card is an avoidance technique that makes life a bit easier to live. Behind all our heroics and saving lives lies a coward afraid to face our social responsibility to pay back debt that we chose to take out. And behind every accomplishment lies a lifestyle creep that is avalanching too fast out of our reach, propelling doctors further forward towards an unsustainable way of living.

The real reason doctors “can’t” pay back student debt is because they won’t.

They choose not to work hard anymore. It isn’t burn-out, although that stuff is real too. It’s the social expectation that a doctor’s life is breezy. The mindset to pay back debt just isn’t there. Many cannot accept that graduation is not the end-game. They think they already won.

There will be excuses. I don’t buy any of it.

There will come a day when I will finish my loan repayment journey, and people will think it’s a miracle. They’ll think I was one of the lucky ones, rather than a penny-pinching maniac. Perhaps the stars aligned and the pandemic gave me this “unique” ability to pay back loans faster because I was not being charged interest for six months. My parents must have helped me out. An investment strategy probably worked out for me but not them. I can’t wait to see the excuses they make. But none of that will be true.

My current car is a high-school ride that I’ve had for 13 years. The passenger’s rear-view mirror doesn’t match, because when someone broke it (probably to re-sell it), I didn’t want to pay an extra $60 to get one that was white when the stock color was black. Mike even helped me put it on the car myself because I didn’t want to pay a service fee at the auto shop. My neighbor came out of his garage this past week and looked at me funny when he saw me physically hand-washing my car. He said, “That’s … nice…” and walked away slowly.

I sometimes have to wipe graffiti off my windows, because I chose to live in a lower income neighborhood so that I could buy a business storefront AND a dwelling at a very low price. Last Friday night, it was getting ratchet at the club next door since they moved the party outdoors due to COVID restrictions. I’ve had to run away from my own home before when the riots first started and they fired fireworks at the cops.

I spent a third of last year working midnight shifts. I still wear my USC scrubs that I was forced to buy upon entering dental school in 2012. I run with the Nike’s that my husband bought me as a gift when I was attending dental school so that I could “be cool”. They used to be orange but now they’re mostly black. I sell my de-cluttered stuff on Poshmark. I research heavily in order to travel the world for FREE. I come home from work to work. I still actively budget every week. I aim to spend only $200 a month in groceries for the two of us and $150 a month in dining out. I created a lifestyle where my job is three blocks away, to reduce the gas I have to buy. TO REDUCE THE GAS I HAVE TO BUY. I spent my last birthday repainting our bathroom. We spent Mike’s birthday picking up birthday freebies. Heck, even our cat was free.

Do you know the real reason THIS doctor can pay off student debt?

Hard work and a willingness to.

It’s not rocket science.

Finance: The Third Year of Paying Down $575,000 in Student Loans, An Update

Every May, I post an update on how we are doing with our path to financial independence, which largely depends on our student loan repayment plan. If you haven’t already heard the story,  I graduated at the age of 26 years old (turned 27 a few weeks after graduation) with more than half a million dollars in debt. A weight that was too heavy to bear, I decided to shun the common notion of waiting 25-30 years for loan forgiveness and instead to get rid of the debt as fast as I can.

Three years of aggressively tackling my loans is coming to an end, and what a journey it has been! You can read about my first two years here and here. As every year before, I will summarize what we have accomplished financially since last May, and how we plan to move forward and snowball our way down to being $0 in debt.

A Summary of Accomplishments for Year 3

This past year, there have been numerous accomplishments that I am very proud to share. It has been a year of experimentation and discovery for us both. But also, a year of triumphs over a few financial hurdles. Here is what we’ve done.

  • I opened a bakery and managed my own small business with one employee for an entire year. One of my life goals was to pursue my hobbies and possibly make them into mini-side-hustles. Other jobs that I had last year on top of dentistry was this blog space and dog-sitting via ROVER. After a year of baking for local restaurants, coffee shops, and markets, I closed my bakery two weeks before the COVID-19 pandemic took place.
  • My husband wanted to switch careers. He has been interested in coding for some time and he decided to take a coding boot camp in order to be able to do systems analytics for large data sets. We enrolled him in a program which started January 2020 and paid for the schooling in FULL (it cost $8k) without reducing the amount we put towards student loans. We took the money from our “emergency fund” and built it back up over the course of 3 months. In February of 2020, when the company he was working at was doing lay offs, he requested to be considered for it due to a nice severance package for two months which ended on April 7, 2020.
  • COVID-19 epidemic happened which ended up helping us financially. My husband, whose severance ended in April, then applied for EDD and instead of getting very little money during this period of professional transition, he gets paid $4200 a month from the government.
  • As a dentist during COVID-19, I was in a precarious position. I split my time between two dental offices and was working 6 days a week prior to March 15. However, the government decided that dental treatment should be limited strictly to emergencies, thus causing one of my offices to shut down for the time-being. Luckily, the other office located 3 blocks from my house stayed open and I was able to work 3-4 days a week due to a particular patient pool. A 3-mile radius around our office houses over 330,000 residents who are mostly within a lower social-economic status. They usually do not have time to worry about preventative dental care and go to the dental office only when something hurts. Thus, emergencies ran amok. Additionally, 80% of the patients I see have Medical. Therefore, Medical covered all root canals and extractions at 100%, and everyone who came in with a medical emergency pretty much had a free pass at getting the treatment started on that day. Since most other dental offices were closed, patients from 30 miles away were driving to see us, too. If it were any other dental office, I would have been sitting at home like all my other colleagues but due to sheer luck, this actually kept us afloat.
  • COVID-19 helped us even further by reducing the interest rate on student loans to 0% until the end of September. This is a dream for all graduates paying off student debt, especially if they are paying it off aggressively. With the uncertainty that came in March, we paused student loan repayment and kept all our incomes liquid. However, now that we realize that the stipend from EDD for Mike and my work situation puts us at a stable financial position, we have enough set aside for student loans to bring us in the $300,000s ($375k to be exact)! Which is CRAZY! That means that in three years, we were able to go from $575k to $375k at a 6.8% interest rate. So now, we are tossing and turning the option of partially withholding some of that loan repayment money and putting it into buying a second property that we can use as a rental unit – thus increasing passive income. We are still up in the air about whether to experiment with real estate or focus on paying down loans. Perhaps we get both?
  • This past weekend, we finished off my husband’s car payment, a loan that lasted five years. My husband has owned three cars and three motorcycles. Five years ago, he was convinced by the dealer that he should take out a car loan to improve his credit. His other motor vehicles were always bought in full and in cash. The dealer recommended a car loan to improve his chances of being able to get a house mortgage in the future. Since Mike has no history of accruing debt, opening his first credit card AFTER graduating from college, he technically had “bad credit”. Mike signed up for a car loan and while I agree it improved his credit tremendously, I also get weak in the knees thinking about all the money we lost on interest. It’s a screwy system. But now it’s all over, which adds that monthly $585 car payment towards liquid assets which we can put into our loans or a rental unit.
  • Speaking of mortgages, we are finishing up our home refinance, which if successful would reduce our monthly payments by $500 a month. Add this to the savings from the finished car payments, and that’s an extra $1k to put towards snowballing our path to FI.
  • Lastly, we made a few adjustments including switching our car insurance and our homeowner’s insurance to a different company so that we can shave off an extra $100 per month. Now that Mike is at home working on his course, we have saved money on dining out since someone is always home making meals. Also, without the bakery, I have less stress and can focus on improving our finances and other aspects of our personal life.

How to Continue Snowballing

There are many ways in which we are snowballing the loan repayment so that we gain momentum and speed as time progresses. An example of this is the car being fully paid off, which then adds an additional monthly $585 towards our repayment plan. We had created many ideas along the way on how to make our repayment system better. Here are a few ways.

  • The Repaye program pays 50% of interest for the first three years of the program. By switching to REPAYE within the first year of repayment, we have saved thousands of dollars on interest. The final year of REPAYE is this coming year. We hope to reach mid to low $300k by the time it ends.
  • After the 50% perk of REPAYE ends, we hope to be at a low enough dollar amount to refinance the entire student debt. If we can refinance at 3% instead of the 6.8%, that would speed up our progress tremendously. Also, as the principal amount decreases, more of our repayments go towards the principal itself.
  • We are debating about purchasing a second property as a rental unit. If we do, we are searching for one that would at least cover the mortgage and it would be swell if we could find one that can actually rake in a bit more than the mortgage per month. This builds equity under our name and sets us up for passive income in the future in case we pursue early retirement. As we get closer to the end of the student loans, we always have the option of selling it (assuming it accrues value) towards the end of repayment to get a chunk of liquid assets and put it into the loans. Of course, the latter option is less financially savvy.
  • Currently, with me working and Mike unemployed, we can still afford our monthly $6.5k student loan payment and our living expenses. My hope is that Mike will get a job after the coding program that he enjoys and we can funnel 100% of the additional income into loans.
  • Currently, we are renting the bottom floor of our loft to my brother’s girlfriend for a very cheap rate to help her out. My brother is currently in Arizona starting his second year of dental school in the Fall. There has been discussion about them moving in together in a year or so. Of course, we would love for her to stay with us forever and ever but if she does choose to move to Arizona, we can definitely rent the bottom space closer to market value. Since our live-work-loft is commercially zoned and faces a downtown area, we can rent the bottom space to either a business or a resident. Our options are widened by the fact that it can act as an office space or a storefront.

When we first started our student loan repayment journey, we thought it’d be great to pay it back in less than 10 years. The first plan we made put us at 9.8 years. We made such good headway the first year but it wasn’t until Travis Hornsby from Student Loan Planner tipped us off on switching our repayment plans in order to save more money that our trajectory put as at paying back the debt in 7 years. With COVID-19’s help, I did the calculations at the current rate, I can repay it in 3.5 more years. But assuming Mike gets a job soon after his coding camp ends in June, I think we can actually finish this in only 2.5 more years.

And to think that people almost convinced us not to do it. They said life would be very difficult for us personally and financially. Yet we are the only couple we know who are calling the shots at work, creating our own schedules, switching professions if we wanted to, pursuing hobbies as options to replace work, traveling the world freely, and living a relatively stress-free life. Choosing the harder path, the road less traveled, really set us up for a different life.

Which is to say that sometimes, it pays off to follow your gut. Reach for your dreams. Look at more than just numbers. Surround yourself with like-minded people, cut out societal expectations, go rogue and run like vagabonds toward the nearest exit signs. Be afraid and do it anyway. Live life to the fullest, you’ll have no regrets.

Here’s to Year #4! Cheers!

Tips for New Grads with Large Student Debt

  • Get a consultation with Travis Hornsby of Student Loan Planner. I know it costs money and it feels difficult to pay more money when your goals are to save and pay back debt. But you don’t know what you don’t know and Travis is well-versed in student loan repayment options. Even when we were already aggressively tackling our student debt and working with an amazing financial planner whose wife was a dentist herself, Travis still taught us a few things we didn’t know. He saved us about $10,000 by simply placing us in a different repayment plan!
  • Run the numbers. This may be hard without someone’s help, but you’ve really got to run every possible repayment scenario to see which one saves you the most money. Of course, in the end, you may choose the one that affords you the lifestyle you want. In our case, we chose the one that does both. By choosing to aggressively pay back debt, we are saving more than $100,000 than if we just waited for forgiveness 25-30 years later. We also are freeing ourselves us 15-25 years sooner than our peers, which is a huge psychological benefit. Notice that I said we chose the one that saves us the most money. Travis will argue that we didn’t choose the one that would make us the most money. Which is true considering you can invest over 25 years of working. But I guarantee you we chose what was right for us.
  • Figure out your priorities in life. The best thing our financial planner did when we started talking about our finances was to spend a few sessions in the beginning asking us the hard questions to try to figure out what exactly we wanted. It was like marriage counseling for money. The top few items we had were to spend time with family, travel the world, and have the freedom to pursue our interests and hobbies. Freedom and independence dominated the conversation, and it was because of this that we decided aggressive repayment was the way to go.
  • Master a budget. You have to start somewhere. Mastering the budget is where you have to start. You can always increase your income, but if you never learn to curb your spending then there is no point. I made this course FREE on my blog to help as many people out. We use YNAB to manage our budget.
  • Surround yourself with a community of like-minded people. There is that saying that you are as good as the 5 people you surround yourself with. I choose to surround myself with finance resources. My favorite finance podcast is ChooseFI, but there is also Afford Anything and FIRE drill. My favorite book is Your Money or Your Life  by Vicki Robinson but other goodies are The Simple Path to Wealth and Goodbye Things. And then, of course, there are blogs, including Mr. Money Mustache, Mad Fientist, JL Collins, and The Frugalwoods.

Student Debt: How to Lower the Interest Rate Without Refinancing Out of The Loan Forgiveness Program

This post may contain affiliate links. Please see my disclosure to learn more.

Almost a year ago, I wrote about refinancing and leaving IBR for good. We hadn’t refinanced up to that point because we were not sure if we had the frugal muscles and the mental and emotional strength to tackle my student debt, and we knew that refinancing would mean that we could never run back to the Loan Forgiveness Program if we ever hit a rough spot. Once you refinance, you are no longer eligible for the Loan Forgiveness Program. A pro of the Loan Forgiveness Program is the flexibility to revert back to a minimal payment of a small percentage of your income when times are tough. Meanwhile, you also having the choice to pay back the debt aggressively if you are able. If you refinance, well, it’s either you make those whopping payments (which in our case is $6,500 per month) or end up in mad doo-doo if you fail to do so.

After a year of paying back debt aggressively, it was obvious that we were BOTH in it for the long haul! We were ready and capable of getting these loans out of the way. So we said, “SCREW IBR, let’s refinance!” The worst part about IBR is the high interest percent rate of 6.8%, which meant that about half of our monthly payments were going towards interest alone! YUCK. This is the main reason why we wanted out.

We were very serious about the whole thing and even started researching refinance options. The list of lenders that we found included the following:

We got quotes from every lender and were about to pull the trigger, but we didn’t.

Why? By some stroke of luck, we went down the rabbit hole of purchasing our first property and held off on the refinancing of the loans until that was secured. However, once we had settled into our new home, Mr. Debtist’s start-up company went through some tough times and Mr. Debtist’s salary went down by 50%! At the time, this seemed like terrible news, but we were actually lucky in that we hadn’t refinanced yet and life had the opportunity to teach us a lesson: that maybe the flexibility of Loan Forgiveness Program was essential. With a loan this large, the flexibility of the Loan Forgiveness Program makes our journey much more comfortable! Shortly thereafter, I had my third stroke of luck. I spoke with Travis Hornsby of Student Loan Planner. If you have not already interviewed with him and you have a lot of student debt, I would just like to say that although his calls are pricey, they are WORTH it! You’ll soon see why!

In this interview, Travis informed me of a way to improve our aggressive loan repayment strategy. I learned that by being in IBR, we were missing out on an opportunity that another loan forgiveness program offered. Which is why it is important to know the differences between IBR, PAYE, and REPAYE! We learned that REPAYE helps our significantly by covering 50% of our interest every month! Just by switching to REPAYE, we were able to save over $7k in 8 months (find out here).

Since REPAYE covers 50% of  the interest, it is as if we refinanced to get a better interest rate. The interest that we have still yet to cover with our payments come out to be about 3.4% of the loans. I like to think of this as a way to get a lower interest rate while still keeping the flexibility of loan forgiveness. Even though Mr. Debtist’s job situation has  stabilized, we still never know what life may throw our way. Being able to fall back on those small payments give us a lot of peace of mind. Meanwhile, we are able to funnel even more money towards paying down principal!  It’s the best of both worlds.

I think that Travis saved us from making a decision that could put us in a bind during tough times, and he also helped facilitate our loan repayment journey. This is why I think it is so important to talk to someone who can really guide you find the most optimal path for your loan repayment journey, especially when you are talking about student loans this big. If you’ve been thinking about talking to someone but are not sure if it will even help, I bet you Travis is your guy. Schedule your consult with Student Loan Planner if you are feeling lost or simply looking for loan repayment alternatives.

In short, my advice is this. If your student debt is less than two times your salary, then maybe refinancing is a doable option. It won’t be easy, but it would be doable. However, tread with care. If your debt is more than two times your salary, highly consider sticking with Loan Forgiveness, even if you have plans to attack it aggressively. Only because life is a mess and would take any chance it has to throw you a curve ball. Ultimately, I truly believe that everyone can find a path that is in line with their lifestyle and life goals.

When we started, we were told that paying down our loans in ten years with our salaries was impossible. But deep down, I knew that we could do it and that it would be the best path for us. So we set a plan to pay it down in 9 years. Before we talked to Travis, I was hoping to escalate the plan even more and pay it back in less than 9 years. After we made the change to REPAYE, I now have hopes to get rid of it all in 7 years or less. We are implementing a number of side hustles and budgeting tactics that are speeding up progress! I can’t wait to see how much more we could do. Thanks for being here, supporting our journey, and following along. 

 

Finance: The Second Year of Paying Down $550,000 in Student Loans, An Update

I can’t believe how fast time flies! The second year of paying down my student debt has passed, and I didn’t even notice. After the first year, I posted an update that outlined a review of our journey. It seemed to help some, so I decided to do the same for the second year. This year there were some ups and downs (a lot more downs than we thought would happen), but I am so pleased to announce that we are on track to finish paying off our debt in under 10 years. In fact, if we continue on this same trajectory that we’ve been on, we are actually estimated to finish 6.9 years from now, for a total of 8.9 years!! And I have high hopes to bring that number even lower. Read on to find out how we got here, and where we plan to go.

Related Posts:

To recap, we started off our journey with $574,034.50 of student debt (including the interest that had accrued)! All of which was mine. To date, we have paid a total of $145,128.48 towards my student debt over the last two years, bringing the principal amount down to $481,368.06.

To understand the progress, do recall that after year one, only $28,000 went towards paying down the principle. The rest of the $84,000 that we had paid towards the loan went towards the interest only. This means that only 33% went towards paying down the principle amount of the loan.

In year two, you start to see improvement. Of the $61,000 we paid to the loans, $29,000 went towards paying down the principle. That’s 47.5% of our payments going towards actually making the loan smaller!

Off course, you will see right away that we paid way less towards the loans in year two ($61,000) versus year one ($84,000). If we had paid the same amount or higher, we would have had an even higher percentage going towards the principle balance. So I guess this is a great time to recap what slowed us down this year.

THE SET-BACKS

  • In September of 2018, we decided to buy property. Property ownership was something we felt was right for us to do. We bought a live/work space that we hope to utilize in the future for some sort of business. Meanwhile, we are co-housing, or as financial independents might say, house-hacking, our way towards paying down the mortgage. Buying the property did entail two things to happen: We used some of our emergency fund to place a down payment on the home. Because of that, we are now re-building the emergency fund back up to what it was, which decreased our ability to pay back loans. Currently, we are setting aside $1k a month to rebuild the emergency fund and are on track to being back to normal in March of 2020. Also, it raised our total payments towards our housing a teeny bit, since now we pay for things like HOA fees and home insurance.
  • In October of 2018, we were delivered some shocking news. Mr. Debtist’s company experienced a laying off of 80% of the people working there, and even though Mike was one of the “lucky” few to stay, his pay got decreased by more than 50%! It was something we were not really prepared for, so on top of wanting to re-build the emergency fund, we also had to deal with a huge blow to our income. Since we were living off of one income, the change in salary really affected our ability to pay down the loans. But we made it work! That’s part of the joys of being on Loan Forgiveness Program even though we were paying it back aggressively. They still only required the minimum payments. Off course, we continued to pay more than the minimum. We were able to keep up with the interest that accrued and to slowly bring the loans down.

THE POSITIVES

Now that those two negatives are laid out, here are some positive things that happened!

  • A conversation with Travis from Student Loan Planner (affiliate link) is saving us THOUSANDS of dollars. He brought to our attention that we could optimize the loan repayment by switching from IBR to REPAYE. How does this help? Under REPAYE, the government subsidizes the interest at 100% for the first three years for an subsidized loan, and at 50% for unsubsidized loans and subsidized loans that have been present for longer than three years. Which means every month, we are given a free $850 to go towards our loans and help us out! This is fantastic because now that Mr. Debtist has a new job and we are back to our previous income, we also are getting help to pay back the debt. Whereas last year we were paying $6,500 per month towards the loans, we are now sending $7,300 towards the debt with the help of REPAYE’s stipend. And while we were dealing with the smaller income stream for four months, we were still getting that helpful $850 to add to the few thousands that we were contributing to the loan. If you want some loan advice, I really think Travis is your guy, and you can schedule a call with him to discuss your particular situation.
  • Additionally, the side hustle game has been ramping up since 2019 started! Now that we have our budgeting in order, it was time to start increasing our income. I was already writing on this blog and doing some dog-sitting on Rover, but I just recently started as a bread baker, and soon thereafter opened my own bakery called Aero Bakery. In January, I made only $14 in side-hustles, which made sense since we were off traveling in Australia and New Zealand for the first half of January. In February, I made $450, and in March, I made $750. For April, I am on track to make an extra $1,500 in side hustles! Read more about why I am an advocate of side hustles, here.

Why the Future Is Bright

So now, we are not only back on track with making $6,500 payments, but we are actually on track to be finished one year early! How did we do that? By being AGGRESSIVE. The minimum payment for a 10 year repayment plan was $6,063 a month. We set our sights on $6,500 a month. Even with the lapse during those few difficult months while Mr. Debtist struggled with his work situation, we were still able to be at a point where we have only 6.9 years to go! How exciting is that?! And what’s even more exciting is that I predict this will all snowball even more! I turn 30 years old this year, and wouldn’t it be great if this would all be cleared by the time I turn 35? That’s right! I have my sights set on getting rid of this in 5 more years. Here’s what we have planned.

  • Since we are now switched to REPAYE, we are making $7,300 contributions towards the loans, instead of the $6,500 that we were previously doing under IBR. That will vastly improve the trajectory of our path.
  • In March of 2020, we predict to have saved enough for our emergency fund, leaving an extra $1k to be funneled into the loans. That would increase our contributions next year to $8,300/month.
  • Also in Spring of 2020, Mr. Debtist is scheduled to finish his car loan payments. While I was in dental school, Mr. Debtist got a car loan and we currently pay $585 towards it every month. Freeing up $585 will increase our loan contribution to $8,885/month.
  • The side-hustling is just getting started. I hope to continue with many of these hobby-turned-hustles, and we will see how that impacts our payments.
  • Lastly, we decided not to refinance our loan at this time because of the risk of not being able to meet the minimum payments in case we have another fiasco like the job situation. However, when the loan is small enough (say under $300,000), we may still consider refinancing the loan. It’ll be less of a risk at that point, since the monthly payments will be way more doable. If we DO refinance as we get closer towards paying the loans off, then we will be able to attack the loans at an exponentially improving clip.

Please note that we are paying back student loans aggressively, but we are also doing it responsibly. We are living within our means, investing in our 401ks respectively, and are diversifying by entering real estate last year. I make myself less susceptible to fluctuating job conditions by having my own dental S corporation, opening my own bakery, working as a dog-sitter, working as a baker for another company, and doing some writing on the side. We are also a dual-income household, which greatly affects the possibility of this success.

If you are feeling lost in your student loan repayment journey, or you simply want to know your options, I would start with talking to a consultant at Student Loan Planner. This path is not for everyone, but it also may be more doable than they want us to believe. For those who just want to get budgeting down, why not start with my free course on creating a budgeting tool?

How Switching Your Student Loan Forgiveness Plan Can Save You Thousands of Dollars!

This post may contain affiliate links. Please see my disclosure to learn more.

How would you like to save thousands of dollars a year, simply by switching the loan forgiveness program you are on? We know we did! A recent conversation with Travis Hornsby of Student Loan Planner informed us that we could speed up our loan repayment simply by switching from IBR to REPAYE! The information that Travis shared with us was so valuable, because it could in fact save us thousands of dollars on our student loans! That’s equivalent to refinancing to a lower rate, thus cutting down our repayment timeline, while still allowing us the safety net of being in a loan forgiveness program. After conversing with Travis for an hour, I would highly recommend Student Loan Planner as the starting point for any student or new grad looking for student debt advice.

So how do we save $$$ this year? It’s simple. All we need to do is to switch from IBR to REPAYE. Today, I will outline why.

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A Case Study: IBR VS REPAYE

We were under the IBR program since we embarked on this journey to repay our student debt of $574,000. Before you consider which loan forgiveness program you want to choose, you should probably read Finance: Student Loan Forgiveness Options: IBR VS PAYE VS REPAYE. We had initially chosen IBR despite the fact that the monthly payments would be 15% of discretionary income vs REPAYE’s 10% of discretionary income because of this one factor: IBR allows you to file taxes separately as a married couple and it will only consider the loan holder’s income, versus REPAYE which will consider the income of your spouse as well. Since Mr. Debtist also makes a six figure number, we figure that we would have the better deal using solely my income.

Here is an example of how to calculate that:

Let’s use estimates from our personal story to calculate the difference.

Assume that our loan is an even $550,000, my income (the debt holder) is $125,000 and Mr. Debtist’s income is $120,000.

Under IBR, they would calculate our yearly loan payment by multiplying my income by 15%.

125,000 * 0.15 = 18,750

Now we divide that by 12 months to find the monthly payment.

18,750 / 12 = 1,562.50

Therefore our monthly payment would be $1,562.50 under IBR.

Under REPAYE, we need to use the total household income of $245,000 to calculate the yearly payment, however we will only be paying 10% of our household income.

(245,000 – 1.5 * 16,460) * 0.10 = 22,030.85

To find the monthly payment, divide by 12 months.

22,030.85 / 12 = 1,835.90

Therefore our monthly payment would be $1,835 under REPAYE.

As you can see from this example, IBR would be the better payment plan because you would be paying the cheapest amount per month and allowing the program to forgive as much as possible.

HOWEVER, there is a rule with REPAYE that IBR does not have. REPAYE will subsidize 100% of the interest accrued for the first three years for subsidized loans, and 50% of the interest accrued after the first three years, which changes the game. Note, if you have unsubsidized loans or GRAD PLUS loans, they will only pay 50% of the interest accrued, period. Let’s see how.

Under REPAYE, the government will subsidize the interest that does not get covered by your minimum payment. In my case, I took out GRAD PLUS loans, so that would be 50% of the interest that accrues. We have already calculated the monthly payment to be $1,835.90. Let’s convert that to yearly payments.

$1,835.90 * 12 months =  $22,030.85 owed this year under REPAYE

This year, based on last year’s income, we owe $22,030.85 in total payments under REPAYE. We also know that interest on $550,000 at 7% is $38,500. Therefore, our payments under REPAYE are not even enough to cover interest, as is usually the case with a loan this large.

So the difference is calculated as follows:

$38,500 – $22,030.85= $16,469.15 * 0.5 = $8,234.58

Which means that for our case, the government will subsidize over $8k per year! You would be missing out on thousands of dollars just by being on the wrong program! We certainly did.

Why We Stuck with IBR in the past

We decided to be under IBR right when I got out of dental school, BEFORE we decided to pay back our loans aggressively. The reason being in my first year, I only worked for the last three months of the year, having waited for my license to be approved after graduating in June. In my first year’s taxes, I made $25,000. So taking 15% of $25,000 would be cheaper than 10% of $145,000. Now in the second year, the numbers completely changed since I started working full time for the entire twelve months. My salary jumped from $25,000 to $125,000. The ultimate question: Why didn’t we make the switch?

In April of my first full year of work, we had decided to pay back the loans aggressively. Meaning, our monthly payments were MORE THAN the minimum amount required. In order for there to be excess interest accrued on the loan, our monthly payments should not exceed the interest gained, which was about $3,000. But since we were paying our debt like CRAZY, we were actually paying $6,500 towards the loans, so no interest was accruing and it did not matter if we stayed in IBR or went to REPAYE.

Or so we thought…

We were VERY wrong!

A Common Misconception

According to Travis Hornsby of Student Loan Planner, REPAYE calculates the difference between the interest accrued and the amount paid back on the loan at the beginning of the year. REPAYE assumes that you will only make your minimal payment each month, which means that they lock in the assumption that $11,500 would be accruing in interest (for our particular example). Every month, they will subsidize a portion of your loan to make up for the interest that will supposedly accrue, REGARDLESS OF THE MONTHLY PAYMENT YOU ACTUALLY PAY. It doesn’t matter if we pay $6,500 towards the loans or if we pay the minimum amount. Either way, REPAYE will subsidize the difference between the minimum payment and the interest that’s being charged. So we have actually missed out on an opportunity here! What’s passed is past, but we are definitely jumping from IBR to REPAYE ASAP!

What Switching from IBR to REPAYE will save us.

We need to make this jump because of the following:

  • It will save us tens of thousands of dollars in the long run.
  • Making the change will be the equivalent of refinancing to a lower rate without actually having to refinance! Which then gives us the safety net of staying in a loan forgiveness program. If ever life throws us a curveball (such as an accident, layoff, disability, sickness, or our worlds fall into chaos and we cannot work), then the loan forgiveness program will give us the flexibility to not HAVE to pay $6,500 per month.
  • After all the money we save, we can cut our repayment timeline down to 7.5 years!

Off course, not everyone under IBR should automatically jump to REPAYE! You have to pick the financial path that is right for you, considering your personality, your goals, your lifestyle, and more. If you are looking for sound advice on how to create a student loan repayment plan customized for your situation, don’t hesitate to contact Travis Hornsby, founder of Student Loan Planner, using my affiliate link. It will be a very rewarding hour! And check out my second podcast episode with Travis, to be released in 2019! Stay tuned.

Finances: Why We Are Refinancing and Leaving IBR Behind, For Good!

Before we head off to Portland, OR, we wanted to share with you guys some very exciting news! We are finally pulling the plug on student loan forgiveness, completely! We are in the process of refinancing our student loans, and leaving IBR behind, for good!

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Why haven’t we refinanced sooner, you ask? Well, there is a clause in the student loan forgiveness program IBR that states that once we refinance our loans, we will no longer be eligible for the student loan forgiveness program in the future. Meaning, if something happened, like one of us lost our jobs, we would still need to continue to make the $6,500/month payment from now until forever (or at least until we are free from the loans). If we stuck with IBR and one of us lost our jobs, we could revert back to paying the minimum payment under IBR (which is calculated as a small percentage of your income), until we could dig ourselves out of the rut. You can see why refinancing can be a tricky thing. A life event that changes our financial situation could immediately cause us to get in trouble with the IRS if we cannot maintain that $6,500/month payment. In other words, we were giant wussy pants and scared of what could happen. We were not quite ready to leave the safety of IBR when we decided to pay down our loans a year ago.

However, under the IBR program, my student loan with Great Lakes is charged an interest of a whopping 6.7%! By refinancing, we could lower that down to about 5.5%. It doesn’t seem like much, but on a loan this huge, it makes a big difference. To give readers an idea, for a 10 year refinance at 5.5%, our monthly payment would decrease from $6,500 to $5,300! Or, put another way, if we continued the course of paying $6,500/month, then we will be done with our loans in 7.5 years! I don’t know about you, but both perspectives are extremely exciting and extremely enticing.

I have spoken about us paying down $84,000 towards my student debt of $550k+ in the past year. Initially, we didn’t know at the start of our journey whether we would be able to make the large monthly payments. We wanted to try it out, but were afraid that we would not be able to support the lifestyle we want and still have enough for the loan amount. What we found was that we were able to alter our lifestyle in order to make our payments, and our lives have much improved from it. After one year, we are extremely confident that this is the path we want to take, and that we can do this! We are no longer afraid of the what-ifs and are ready to take a leap of faith (in ourselves) and just turn our backs on student loan forgiveness for good!

So what happens if some life event occurs that dramatically impacts our finances? We haven’t forgotten about the possibility of one of us losing a job, or a natural disaster happening, or a family emergency occurring, although cross our fingers, legs, toes and arms that none of these ever come to fruition. But we HAVE thought through a series of possibilities that could help us in such scenarios.

  1. Have an emergency fund. Over the past year, we have built up an emergency fund that could support us for 2.5 months if one of us loses a job, or for a little under 2 months if both of us lost our jobs. We will continue to add to this emergency fund and over time, it should be a very big safety net for us (or it could help us pay down loans faster towards the end!)
  2. Make use of the lower monthly payments. There are TWO ways we could make use of the lower monthly payments. The first is to pay the $5,300 per month minimum payment, and stash the difference ($1,200) in the emergency fund every month. Although a viable plan, that isn’t the path we are going to take. The other is to continue paying $6,500 a month since we can support that payment, and plan to be done in over 7 years. Because we would be paying extra $$ a month, we would be paid ahead. Meaning, if something were to happen, we would have accounted for future payments already, and would likely have a buffer of time before we are back to our originally determined schedule.
  3. Rely on the loan’s forbearance policy. Loan companies want to get paid. If someone really cannot make payments, then the loan’s forbearance policy will temporarily allow non-payment for a set number of months. The interest will still accrue, but it is a back-up!

Luckily for us, our jobs are very flexible and we don’t really see ourselves without work for long periods of time, but you never know what the future may hold, and sometimes life gets out of control. So, yes, it IS still wildly scary for us to be doing this! Too risky for some. But I believe in our abilities and focus and determination. And we want to inspire other people to feel like they could be freed too.

How about you? Feel like this is too crazy a venture, or would you be willing to try too?

The Value of Having a Certified Financial Planner (CFP)

This post may contain affiliate links. Please see my disclosure to learn more.

Today, I wanted to pose the question, “Is having a CFP right for you?” When I first graduated from dental school, I was absolutely lost. Along with the feelings of excitement and pride with my recent accomplishments came a subtle (but over-powering) dread, and a very heavy, invisible weight. I knew I needed guidance, but did not know who to reach out to. I did not exactly have adults in my life who could act as good financial role models (my long historical relationship with money detailed here), and there are very few people I know (outside of my fellow graduates) who really had the problem of paying down half a million dollars in student debt at 26 years old. So I reached out to Andrew Davis, the CFP behind SeamlessFP, who happened to be the husband of a dental classmate, and whose work focused on guiding newly-graduated dental students, specifically. I think it was the best decision we ever made.

On the flip side, there are people who would argue that CFPs are a waste of money, and that money could be used elsewhere. Which is a fair argument. I myself am a big fan of avoiding outsourcing tasks as much as possible. It will take a bit of work, but handling your own finances is totally a doable thing! However, it requires time, which I have value over money. Delving into research isn’t such a scary thought for me, but spending all my free time learning the nuances of taxes, S corporations, estate planning, investments, and more is NOT an enticing thought. So what I want to discuss today is the value of having a CFP to us, and then I leave the decisions to you.

The value of having a CFP

The list of pros for having a CFP versus not having one is quite long, which is a good thing!

  • Pro: Outsource financial planning to free up time, in order to pursue interests, hobbies, work, etc.

As mentioned before, outsourcing financial planning frees up a lot of our time. Time is a resource scarcer than money in the modern world. People seem to always be running out of it, but are still quick to occupy it with tasks, necessary or otherwise. When you think about how much your time is worth, in dollars, can you really put a price to it? Time is the one thing you are constantly running out of, and will never be able to replenish, making it an extremely valuable resource. Being intentional with the tasks I choose to occupy my time is very important to me. Spiritual uplifting, emotional replenishing, mental healing, these are the things that matter and make it a life worth living. NOT constantly worrying, thinking, and dealing with money.

  • Pro: Peace of mind that we are hitting our financial goals in a very step-by-step (and legal) manner.

This is for the DIYers out there. I am a lover of DIY projects and take pride in my ability to be self-sufficient. However, no matter how much of my free time I put into studying the nuances of finances, I cannot possibly keep up to date with the ever-changing rules and regulations. Mike used to do his own taxes with TurboTax and that worked sufficiently well, but once we got married, added in an S-Corporation with its own separate payrolls, well things got too complicated. We started asking ourselves, “How do we know we are following all the rules? How do we know about the fine-print clauses that benefit us? Who will be flagging our attention with every change?” A financial planner gives us peace of mind, knowing that we are on track to hit our goals in a efficient (and legal) manner. There are many minute details that one could miss, but it makes us feel better knowing that we have someone else helping us with that.

  • Pro: Keep up to date with new changes.

The new Tax Bill that passed last year is a great example of this. Even now, nothing is quite set in stone as to how these changes will apply to us. By having a financial planner, we were alerted to the possible beneficial change for S Corporations in the upcoming year, something we would never have known, but definitely can impact our financial plan.

  • Pro: A resource for learning more.

This, by far, is the most beneficial to me. Andrew has been instrumental in educating us about our finances and different paths we can take to achieve financial freedom. He has recommended books, blogs, podcasts, and other resources. He was actually the one who introduced us to the FI community: a community dedicated to reaching financial independence by using life optimization “hacks”. We would not have gone so far on our financial road to freedom without life hacks such as co-housing, travel hacking, YNAB, and more!

Financial planning VS Investment Planning – What’s the difference?

It is important to differentiate between financial planning and investment planning. We do financial planning, which requires a long-term life plan, created by the marriage between our financial past and our dream futures. Our first meeting with Andrew was not something we expected to have. It began with a meeting dedicated wholly to gaining a deep understanding of our personalities, goals, and dreams. It almost felt like a therapy session, with questions such as, “If you knew you were going to die tomorrow, what would you spend your time doing today?” Don’t let that deter you. I think that first meeting was essential to setting the foundation on which we created our entire plan. The process continues to be a constant reassessment of life. Initially, we listed our priorities as traveling, buying a house, yoga subscriptions, guitar lessons, sticking with loan repayment program, and working until we were 65 years old. Now our life still includes travel, but our goals have shifted to standard repayment, renting for the next few years, working less hours, being a blogger, opening a coffee shop, and early retirement from our lines of work, which would possibly lead us to newer lines of work. In this respect, Andrew acts as more than just a financial planner. He is a psychologist, therapist, educator, mediator between spouses, confidant, & friend. This is NOT to be confused with investment planning, where someone advises you where to invest your money. That is included with financial planning, but not the other way around.

The importance of being a fiduciary

A fiduciary requires that someone acts in the best interests of a client. It is important that your CFP is a fiduciary in all aspects. Conflicts arise when CFPs have affiliations with third parties that may sway their advice towards promoting something that benefits them. For example, a person can receive a profit for selling an affiliate insurance. The insurance may be great, however, that person has a motivating factor that would make him want to promote that particular insurance. Even though it can be beneficial for you to sign up with that insurance company, the decision was not completely unbiased. We did not even realize the importance of being a fiduciary until we learned the concept from Andrew himself. 

If you are not sure whether your CFP is a fiduciary, ask! Try to find a fiduciary in all aspects. You want to ensure that you are being treated fairly at all times. Do not be afraid to ask how they get compensated, so that you can truly see where they are getting their money. It may seem awkward to inquire about it, but it is your finances on the line.

What a CFP has done for us, so far

  • Budgeting Help: Our CFP introduced us to budgeting, setting up our YNAB budgeting tool, and helped us develop good budgeting habits. 
  • Analysis between two potential jobs: When Mike was considering making the move from one company to another, we needed help analyzing whether it was a reasonable financial move. It was not simply a comparison between the two different income, but also required factoring in 401k investment matching, health benefit options, life insurances, difference in commute, and level of interest in the line of work.
  • Investment Planning: He has given us advice on how to manage our 401k portfolios as well as given us other investment tips when we reach out for help. We retain full autonomy as to where we want to invest and how much, but having a third person to go over the pros and cons at each step has been helpful. 
  • Health Benefits: We needed help deciding on a health plan, and have chosen one that works well for us thanks to Andrew’s help. After an analysis of our options, an HSA option was also open to us, and we decided to take advantage of that privilege.
  • Renter’s Insurance: Prior to our new place, we did not have renter’s insurance. After seeing the benefits of having that extra coverage at a small monthly cost, we decided to sign up for one right away!
  • Connection to a CPA: Taxes for SCorps can be a bit tricky. A CPA is advised so as not to miss a thing. Initially, I was going to go with the same person my parents have used for years. But after an hour-long interview with him, it became clear to me that he did not know much about taxes as they applied to dentists specifically. He did not even know about the different student loan forgiveness programs, or how an SCorp can be used for tax deductions. It was useful to be referred to a CPA who frequently does taxes for dentists specifically.
  • Set up my SCORP: This was so beneficial to me! It is possible to create a corporation easily online, however, he walked me through the pros and cons of having an SCORP so that I could make an informed decision as to whether this is something I wanted to do. The application for the SCORP was easy but we did meet some humps along the way that he quickly helped me to resolve. 
  • Setting up Gusto and ways to automate my SCORP: Once the SCORP was set up, our CFP took care of creating an automated payroll for me. We use Gusto to manage my payroll, and once it was set up, he easily walked me through the different ways that we can keep track of the payroll via my SCORP. All I have to do is wait for my payments, the system takes care of the rest!
  • Introduction to financial life hacks: I learned tricks such as travel hacking from Andrew and it was he who introduced us to the FIRE and FI communities.
  • Analysis of student loan repayment options: This is the part about our finances that has most affected our lifestyle. He walked us through the different student loan forgiveness programs that we qualified for. After a thorough explanation of each, he created an extrapolation of our financial futures under each repayment option. By using physical numbers, we were able to predict the lifestyle changes associated with each student loan option. Once we had our budgeting in order, he brought to our attention that we were able to pay down student loans without the forgiveness program, thus saving us more than $100,000 in the long run, as well as buying our freedom 15 years earlier than planned. That decision itself was so life-altering for the better, and we would have never gotten to that point on our own. 

We personally benefit from SeamlessFP

Andrew Davis is the CFP behind SeamlessFP. He focuses on helping newly graduated dentists create a financial plan. He does work with non-dentists occasionally, or dentists who have been practicing for a long time. I only know this because we have referred people in those categories who now are working with him too.

There are multiple options one can choose when working with SeamlessFP. A person can do a one-time consultation in order to gain help on a particular goal or project, or they can choose the full life-planning package. We chose to do the latter option. I did not want help with simply setting up an SCORP. I wanted a more thorough analysis of all of our financial details. I was determined to tackle as many aspects as possible to optimize our financial situation. After every meeting, he will upload a list of tasks via an online portal to be completed. This is helpful for people who need someone to hold them accountable to ensure that they continue moving forward with their financial path. Together, we re-analyze continually to see what we can change to optimize even further. A yearly re-cap meeting is held as well, where we go over our dreams and goals for the future (5, 10, 25 years out) so that we aren’t dully following a pre-set path. Besides, a lot changes in a year!

What I like most is that he is eager to help clients learn more about their financial options and situations. It is clear that having his clients make their own decisions (given the facts) is important to him. I can ask him one question, and we will go over the entire topic in detail, prior to him answering my question just so that I know the reasoning behind his answer. It’s scarce to find that these days, and I wholly appreciate it.He may give suggestions but he really makes sure you know that ultimately, the choices are still completely yours to make. It’s easy to see that his goal is to help his clients find the happiness they seek, by eliminating financial stress from the equation. It also helps that he is very accessible via email or text. Typically, responses occur within one day. Additionally, if you choose the latter option, there is unlimited access. Anyone who knows me will easily tell you that I am the type to ask multiple questions, always in search of a deeper understanding of all things. So a CFP who embraces that is gold. Off course, you want to make sure that the CFP you choose is right for you, if it’s right at all. If you have any interest in learning more about our friend Andrew, you can easily set up a one-hour phone call to speak with him and see what services he can offer you and which package is best for what you are trying to achieve.

Overall, I just wanted to shed light on how a CFP has changed our life in this blog post. As always, you do you.

 

Finances: How YNAB Helped Us Pay $84,000 Towards Student Loans in One Year!

This post may contain affiliate links. Please see my disclosure to learn more.

Looking back on it, it seems absolutely nuts that we have been able to pay $84,000 towards our student loans in the last year. Prior to getting our finances in order, you could say that I was not one who was highly motivated in monitoring my spending. Or rather, I may have been highly motivated, but not entirely good at it. Honestly, I did not know where to start.

I was never afraid of budgets. Some people are. They are afraid that it would be too limiting, or depriving, to set financial constraints on their having fun in life. I get it. YOLO, right? But honestly, that’s just the rub. YOLO. You only get one life, and I don’t want mine consistently anchored down by debt. I want to be free. So it was not the budgeting that scared me, but the lack thereof. In fact, I was always in search of ways to budget. However, I had no idea how to do it efficiently.

We used to implement that all-too-familiar way of assessing our spending by guessing, eye-balling, rounding up and down (depending on our mood), or sometimes, ignoring all-together. Additionally, much of our analysis was performed retroactively. As in, “Oops, I spent too much on groceries last month! Roughly $100 too much.” The estimates, off course, were always too low, and the recognition harbored a bit too late, after the spending was already a done deal. Yikes!

Enter YNAB. YNAB is kind of like that high-school teacher that slaps your wrist and sets a vagabond teen straight. The acronym stands for “You Need a Budget“, and is better than an angel on your shoulder keeping your finances in check. It is a very easy system that is based on the age-old envelope system of budgeting. It used to be that, without computers and programs such as YNAB, people would use envelopes to budget their money. Each envelope would stand for a category. For example: “Groceries”, “Rent”, House Maintenance”, “Savings”, etc. With each incoming paycheck, a person would split the cash in between envelopes, allocating a certain amount towards those categories for the upcoming month(s). One can never accidentally overdraw from an envelope, because once the money runs out, that’s it! In order to overspend in a category such as “Dining Out” for example, one would need to proactively choose to take out money from another envelope, thus consciously deciding to decrease spending elsewhere.

With the invention of things such as credit cards, this becomes an obsolete practice, but I think it is one that is very useful. Instead of retroactively analyzing our spending, we should be proactively planning for our financial futures. In YNAB, you can create categories of your choosing that would be equivalent to those envelopes. You can be as precise or as general as you would like. We prefer to be more general, because it makes categorizing easier. Our categories are separated into “Needs”, “Financial Goals”, and “Wants”. A few examples include:

Needs – Rent, Auto Insurance, Utilities, Cell Phone, Groceries

Financial Goals – Student Loans, House Savings

Wants – Activities/Hobbies, Travel, Mike’s Fun Money, Sam’s Fun Money, Dining Out

So as paychecks roll in, we are proactively placing budgeted money into each category. Every dollar we earn is accounted for, down to the last penny. The goal is to budget appropriately, so that none of the categories need adjusting during the month. Metaphorically, you don’t want to borrow from any of the other envelopes. It did take us a while to get a feel for how much we spend in each category, but that’s the fantastic thing about YNAB. It summarizes previous spending in the months prior really well. Over time, we were able to know exactly what number we would need to budget in each category to be absolutely prepared.

A word on those summaries. This is a wonderful way to get a picture of how much of your spending is going towards your “Needs”, your “Wants”, and your “Financial Goals”. For us, because of our student loans, 50% of our income goes straight towards hitting our “financial goals”. We try to keep “wants” to a low 10% of our income, travel included, which is why travel hacking is so important for us. Also, there are graphs to show you how much your net worth is rising, as well as comparisons of “Income VS Expenses”, if those are motivating at all for you.

All of this can technically be done on an Excel sheet, but it would take a lot of time and effort. What I love about YNAB is that it can link to your bank accounts and automatically record every transaction, whether that’s money going in or money coming out. The only thing left to do is to categorize each transaction. Also, YNAB will remember which transactions fall under which category. For example, we frequently shop at Mother’s Market and Whole Foods for our groceries. I no longer have to categorize those things, since YNAB will automatically do that for me, thus making my job easier.

Off course, YNAB comes with a fee, which luckily for us, is waived by our financial planner. The cost to use YNAB is $89.99 annually, which seems like a lot, but when I look at the number we paid towards student debt ($84,000), I don’t feel bad at all! I think that fee is totally justified, plus it makes the whole budgeting process easier and much more motivating than if I had to go through all of our bank accounts and credit cards and physically input each and every transaction, create analytical comparisons and graphs and pie charts, and let our financial situation take up all of my free time.

If you are someone who wants to know where their money is going, wants to plan for the future, or is already doing both but wants a simpler process, try out YNAB. I hear too frequently the saying, “I don’t know where my money goes!” It’d be nice if we never have to say that ever again. Plus, once you know where it goes, you have the power to redirect it, kind of like we have!