Why Budgeting with Massive Student Loans Makes You Smarter
Becoming a health care practitioner in any field is not only one of the most noble career paths, it is also one of the most expensive.
Along with your shiny new diploma and fantastic career potential, you also have a large amount of debt.
I know this because if you didn’t, you wouldn’t be here.
I also know that, because you reading this article, you are likely interested in reducing that debt in any logical, legal way possible.
Am I right?
The facts are these:
- Graduate school is expensive.
- Graduate school in any of the health care professions is even more expensive.
- We need people in this country to serve in health care professions.
- Student loan debt never goes away.
Sure, there are ways of reducing student loan debt or alleviating the burden somewhat. But even with student loan forgiveness programs and refinancing, there remains the unavoidable truth that the debt remains until you make it go away.
There is no magic bullet to quickly eliminate student loan debt.
How you go about using your expendable money, however, may be a good substitute.
One of the best ways to reduce the debt burden is a good, old-fashioned budget. It’s not shiny, it’s not a new idea, but it is solid, it is customizable, and it works.
Ready to learn more?
You’re Making an Investment in Life
The most important first step to creating a workable budget is one that doesn’t cost you a thing: adjust your perspective.
Remember that in choosing your career path, you chose a vocation. Your student loan debt is not an investment in your education, it is an investment in yourself.
This is an important distinction to make because when you shift your thinking from feeling like student loans are a yoke around your neck to realizing that you are actually funding an opportunity, you begin to really build your future.
Every dollar you pay towards that debt is one more dollar towards you becoming the health care practitioner you always dreamed you could be.
Determine Your Goals
In order to hit any target, it is crucial to first have that target in laser focus. When it comes to a large amount of debt, getting to the day when it’s all gone can feel impossible. Rather than focus on the end goal, consider your smaller life goals, both long and short term, that you’ll work toward throughout your career.
- Do you hope to buy a house?
- Are you planning to get married and have children?
- Maybe you already have one or more children. It’s never too early to start planning for their education. (And yes, your children will be able to go to college despite your own student loan debt)
- Perhaps you need to buy a car
- Or you would like to start a retirement fund (definitely start a retirement fund)
- What about a vacation? Yes, you can take vacations while paying down debt.
Break it Down into Manageable Parts
For each of your goals, both short and long-term, you need financial capital. Yet, it can be difficult (or feel impossible) to come up with any extra money when you have a large loan payment every month on top of the other costs of life.
Don’t let this process feel overwhelming. Simply break it all down into manageable parts.
For example, if you would like to buy a house, don’t think about the cost of the house or even the monthly payment. Instead, focus on step one, which is coming up with the down payment.
Look at where you want to live, get a feel for housing prices, and calculate what you would need to afford a down payment. Perhaps even check in with a loan officer to see what mortgage loan products are available and learn what amount you are qualified to borrow.
That number may still make you feel uncomfortable, but it’s a better number to digest than the cost of the entire house, isn’t it? Plus, it’s always better to know the actual number you need rather than the potential number it could be because the known is always more confidence-inducing than the unknown.
Free-up Discretionary Income
In order to know what expenses you can reduce every month, you first have to understand and really face where your money is going. This is the easiest step to do in terms of taking action but is often the most difficult in terms of actually doing it.
It’s normal to think that if you take a close, hard look at your spending with the intention of finding ways to save money, that could equal a more Spartan style of living.
Not to worry.
Small changes in spending habits lead to big impact with reducing debt. And when you make small changes, you not only don’t feel the pain, you will feel encouraged by the way you are taking control of your finances.
Use an app or an old-fashioned piece of paper.
I won’t judge.
There are lots of free apps to help you track your spending. Give it a month and log every last dollar you spend. Do not feel guilty for what you spend. Just track it.
Don’t let yourself put expenses in the dreaded “miscellaneous” or “other” categories. Everything gets a category. Everything.
After the month is up, scroll through your list and see what there is to see. Again, make no real changes in spending. Feel no guilt. Just look. Consider. Take it all in.
Think about where your money is going that surprised you. Are you spending more on gifts than you realized? What about groceries? Could turning down your thermostat by one degree allow you to stay comfortable while moving the needle on your budget just a little? (Probably. Why not give it a try and see?)
Budget: Consider What You Might Have to Sacrifice
Let yourself get a bit uncomfortable. Making coffee at home takes a few more precious minutes in the morning, but doing this can save you $20 or more every week than buying it on your way to work.
Every month choose one area of your budget like this to tweak. Not obliterate, just tweak. Those little bits and pieces add up. Over time, you will turn these tweaks into habits before you even realize what’s happening. Then, you’ll start to notice having a bit of extra money to add to your retirement account or house fund or other larger goal, thanks to the beauty of compounding interest.
The key is to tackle debt head-on, not ignore it. Ignoring it makes it grow bigger, faster. Tackling it one piece at a time, one dollar at a time, can help you make real headway.
Learn to Love Your Credit Score
A strong credit score is the best result of a strong budget. By creating healthy spending habits for yourself, you will build a strong credit history almost without even trying. A strong credit score means you get better (cheaper) interest rates on things like mortgages and car loans.
A strong credit score is your friend.
If you do not have a strong credit score at present, do not worry. That is something you can build back up over time. If you do not know what your credit score is, you can probably access your score by logging into your credit card account. Most major credit card companies provide your credit score (known as a FICO score) for free.
You can also contact the three major credit bureaus to obtain one free copy of your credit history, and your FICO score, once each year. I strongly recommend that you do this, because the more knowledge you have, the more power over your budget you possess.
What to Do with Your Credit Score Once You Have It
Defend it fiercely. Do not co-sign a loan with another person, and always pay your bills, on time.
In fact, pay at least the minimum payments on all bills, on time, every month and that alone will make a huge impact on your credit score.
Take care not to max out your credit cards, either. The more available debt you have but aren’t using, the stronger your credit score.
By always making the minimum payment, you can work on eliminating debt one small amount at a time so you see progress.
Working with a certified financial planner can also help by providing you with an objective look at your financial health and make changes to help you meet your goals faster.
Keep a Healthy Perspective
Even on your worst day, remember that you really can get there, even with huge debt. You are not alone. This is not your fault.
That your debt situation is not your fault is a bit controversial. There are plenty of people who think that the equation is simple: borrow money, pay it back. Done. Why borrow money you can’t afford to repay?
Except, no one really explained how the debt repayment would work, did they?
Everyone thinks it’s someone else’s responsibility to teach students about debt and finance and compounding interest and loan terms. Yet, there is no class for this. And it is not out of line to believe that:
a) Your university/federal government wouldn’t loan you money that you weren’t qualified to repay; and,
b) You will be able to manage the debt with the high salary you anticipate with your in-demand career field.
Compounding interest isn’t a concept that everyone magically knows about, even when you’re good at math.
And, let’s face it, perhaps someone did tell you about compounding interest and did the math and showed you exactly how much you would have to pay each month, and exactly how that number would change each year as interest accrues while you are in deferment.
If you are like most people, you likely didn’t pay attention to the math and possibly didn’t want to hear it because you dreamed of the day someone would call you “doctor.” Trust me, I know. My wife’s been there.
So someone tells you about compounding interest and you think, eh, I’ll worry about it later, when I’m making six figures a year!
The point here is that right now, today, there is no point in pointing that finger of blame at yourself. Instead, roll up your sleeves and get to work.
Have No Regrets
Really. You chose this path for a reason. You chose this career for a reason. Don’t let the guilt get you down. There is a way out. If you’re thinking that tracking expenses and adjusting your thermostat can’t possibly make a difference in your mountainous student loan debt, know two things:
- Small changes create big habits that equal meaningful change; and
- This is but one strategy toward helping you reach your goals. Signing up for student loan forgiveness or working with a professional financial planner can add bigger change to these smaller, yet still significant, changes.
Debt is not personal. It feels personal because it affects your home, your lifestyle, and not to be melodramatic, but your dreams. But it’s really just math.
Adjust Your Thinking
You’re not rich. There, I said it. I know, you’re earning six figures or more a year. That certainly sounds rich.
Remember: being rich isn’t about income, it’s about net worth.
By adopting a broke mindset, you will be able to do more with your money. You will have more control over your finances and your life.
A budget is all about figuring out what you can cut and what you need to keep. Because you are the only ultimately making those decisions, the act of keeping a budget and finding those extra dollars here and there is empowering.
Maybe you do need that cleaning service because after working 80 hours a week, every week, plus picking up extra shifts at the hospital, you don’t have the energy to change your sheets or clean your bathroom. That’s understandable.
But maybe have the service monthly instead of weekly. Maybe set the timer on your coffee pot to make coffee automatically and fill your travel mug on your way out the door instead of stopping at Starbucks every day. Small changes like these become habits and habits become a lifestyle and the next thing you know, you’ve made meaningful change that positively affects your bottom line.
The monthly payment isn’t the only thing to consider. Remember that the payment is the sum total of two parts: principle plus interest. If you only pay enough to cover the interest or maybe that and a little more, it will feel like you’re never getting anywhere.
It’s like financial whack-a-mole. You strike, and the debt keeps popping back up.
Instead, look at the principle and work out a budget knowing you have to focus on that. Or, focus on keeping up with the interest plus x dollars of principle. Don’t ever forget to chip away at the principle.
If you can, make your monthly payment and then set up your automatic payment to deduct an additional amount from the principle every month. Set it and forget it and watch your debt go down, dollar by dollar. It’s slow, but it happens. Every little bit that you can chip away at the principle adds up.
Then, reach out for information on the bigger picture. With the help of a certified financial planner, you’ll be able to find ways to take advantage of the various loan products, consolidation opportunities, and debt forgiveness programs.
Don’t forget that a budget equals power. Large debt can make you feel powerless, but in truth, you are not. You have the ability to think strategically and make meaningful change today.
So What Does A Budget Look Like, Anyway?
You may have noticed that I haven’t given you specific steps for writing a budget.
That’s because budgets are personal. They are unique to each person and to each situation. When massive student loan debt is part of the equation, it’s best to have a certified financial planner in your corner, guiding you through the process. He or she will help you write the budget that works for you.
The key is that the financial planner is really just a guide. He or she knows the math and the regulations and details on different debt forgiveness programs and ways to consolidate and all of the things you can do with the big picture. When it comes to the budget, the details are all up to you. It’s for you to decide what aspects of your spending are things that are worth having for you or are things you can do without.
What one person might be okay with giving up, another person must have. So, a budget can’t be about which items are necessities versus wants, with the exceptions, of course, of the basics: food, clothing, shelter, transportation. But there are ways of making adjustments within those categories that will help you develop those healthy habits.
The key to chipping away at massive student loan debt is to take the time to review your spending, for real, written down. Actually look at the numbers. Then decide which areas can be adjusted and which can’t. Then pick one area and tweak it. Give it a month, and tweak something else. Keep working on the small things, and give us a call to help work on the big things.
Learn about the ways (big and small) that you can make a real difference in your student loan debt and live your best life by joining the Financial Residency Community on Facebook.