My Student Loan Strategy: $56,000 in 28 Months

Like most college students, I knew I had student loans but I wasn’t exactly aware of how much debt I was bound to pay back following graduation. Student loans are so mainstream in our society that I didn’t think twice about them while I was in school. My Mechanical Engineering degree did get me a very well-paying job upon graduation, thankfully. It wasn’t until I used almost all of my signing bonus to eliminate the federal portion of my student loans for it to hit me.

Altogether, I owed $56,000.

I spent the first 6 months in my new job paying the minimums toward my loan balance without a real idea of when I would be done for good. My commute to and from work soon had me listening to all kinds of podcasts, mainly ones on personal finance. I found The Dave Ramsey Show and became an almost daily listener. Hearing stories about people’s financial situations really inspired me to cut my expenses and get rid of my debt. 

Personal finance became another passion of mine, and I became obsessed with learning about how to optimize my income. I mean, who wants to work until they’re 80 because they’re still paying off debt? Not this girl. 

My Unique Situation

My job had me temporarily relocate to a new city after my first 8 months (something I was planning for, but not quite this soon!) and presented a very unique financial opportunity. I would have a free, furnished apartment in the city, a car, free gas, 2 flights home a month, and a significant meal per diem. I don’t have a car payment and was able to get out of my house lease early without penalty. That means I would have absolutely 0 expenses besides food and fun for 9 months. Talk about income optimization!

I know that I am extremely blessed to have this opportunity, so I want to figure out how to make the most of it. What I realized I was missing this whole time was a focused plan for my income. I spent some time researching and putting together my strategy. Now I know exactly how much debt I’m going to pay off and how long it will take me. Having a financial roadmap keeps you accountable and gives you hope for the future when a good plan is well-executed.

This post will explain why you need a plan, why focusing on one goal at a time works better, and how eliminating debt gives you options. I realize that most people do not have the luxury of saving 95% of their income, but the principles remain the same.

Why You Need a Plan

If you don’t tell your money where to go, you will always wonder where it went. I know so many people my age that don’t track their spending! How are you going to save up for the big things if you don’t know how much you bring in per month and where it goes?

Let’s say you want to save up for a big trip to Europe next year. You estimate the trip will cost about $3500 and you are going in 7 months. $3500 divided by 7 months means you need to save $500 a month to have the full amount saved in time. This is such a simple concept, but it works with pretty much any financial goal you have.

An estimated dollar amount / a timeframe = a plan.

Now you can have a stress-free trip because you worked hard and saved up! It’s so much better than putting everything on a credit card, wondering how you’re going to pay it off when you get home. Make a plan, execute it, and enjoy the satisfaction of knowing exactly where your money goes. It’s time to crush those life goals!

Focused Money Does Better

Before I really started focusing on my debt, I was completely overwhelmed with the number of options I had with my money. Should I pay off student loans faster, save for a house, max out my 401k, or save for a car? My first mistake was trying to do so much at once that I had no real focus. 

Statistics say that focusing on one or two financial goals at a time leads to better results. Buying a home when I have a quarter of my monthly income tied up in student loans isn’t the right move. Not putting enough in my 401k to get the company match leaves free money on the table. I also have a 16-year-old car with 180,000 miles on it, so I want to prioritize saving up for my next vehicle.

My “Pay Off Student Loans” Focused Plan

My overall objective for the next 9 months with no expenses is to pay down as much debt as possible. I finally realized that paying only the minimums meant that it would take over 8 years to pay off my student loans! There are a lot of things I want to accomplish in 8 years. Having that extra money back in my pocket would help me reach my goals so much faster.

Here are the principles I will be living by for the next 9 months:

1. Don’t miss out on the match

My company offers a $0.90 on the dollar match up to 5% of your salary in their 401k plan. You’ll never find a better return on your money anywhere else, so it would be stupid not to put that 5% into my Roth 401k. Realizing that focused money does better, my plan is to put the 5% away, but nothing more, until my student loans are paid off. 401k matching is free money, so take advantage of it!

Even though my goal right now is debt repayment, getting the full company match in my 401k is too good of a deal to pass up.

2. Half to debt, a quarter to savings

To execute my loan payoff strategy, I’m throwing half of my take-home pay toward student loans. I can afford to be that aggressive given my work situation, so I am going full-steam ahead toward that goal.

Along with eliminating as much student loan debt as I can, I also have an aggressive savings strategy. I’m at a stage in my life that requires having a lot of liquid assets for life transitions (moving, saving for a car, building an emergency fund, etc) and I want to be ready for the changes as they come! A quarter of my salary will be divvied up into various savings accounts toward those goals.

Half to debt, a quarter to savings = a winning, executable plan.

3. Meal per diem = “pay your student loan” money

My “temporary relocation” package also came with a significant, daily meal allowance. Seriously, I don’t know how anyone can spend this much on food! Instead of spending that money, I’m using every dollar of my per diem cash allowance to pay off student loans. Yes, this is in addition to half of my base salary going toward debt.

I want to treat this meal per diem as “found money” and put it all toward student loans. I’m not used to seeing this money anyway, so it doesn’t hurt me to not include it in my budget.

4. Have (some) fun

I’ve got a whole new city to explore, so I will be spending some of my money on fun. Even though I will be on a budget, there is some room for meals out, shopping, and entertainment. I’m planning to use my “2-flights-a-month” benefit to visit my boyfriend, friends in other cities, and go home. There is room in my budget to treat them to a nice meal for letting me stay for free! 

Paying off Student Loans Gives You Options

I believe that the root cause of stress in our lives comes from not having options. If you only apply to one college with a 50% acceptance rate, that is stressful because you won’t have options if you don’t get into that school. If you don’t have an emergency fund but lose your job, you’re stressed because you don’t have the option to take a few months off to find the next right fit. You get the point.

Paying off debt frees up your income and gives you options. Not having a student loan payment would allow me to save for a house down payment so much faster. Suddenly, you can afford to max out your 401k or pay cash for your next car because your income isn’t already allocated to someone else before it hits your bank account. I want to pay off my student loans so I can decide what I want to do with my money. Options equal freedom, and freedom equals peace.

I hope this post gave you a glimpse into my mind and an explanation for why I’m doing what I’m doing. meganmakessense.com is a place where we can encourage each other and openly talk about life and how to optimize it. I don’t have it all figured out, but I want to share my knowledge and experiences to help YOU figure it out as I learn more about becoming a self-sufficient adult.

Let me know in the comments if this inspired you to change the way you look at your own finances!

-Megan